On December 28, 2001, the Staff of the Idaho Public Utilities Commission Filed a Petition

MEMORANDUM

DATE:March 13, 2002

RE:Investigation of the Load Reduction Rates from the Letter Agreement Amendment to the Electric Service Agreement between Idaho Power Company and Astaris LLC.

Background

In April of 1998 the Idaho Public Utilities Commission approved the Electric Service Agreement (“ESA”) between Idaho Power Company and Astaris’ predecessor FMC. Under the ESA, Idaho Power provides power to FMC’s elemental phosphorus manufacturing facility in Pocatello, Idaho. Around April 1, 2000, FMC and Solutia, Inc. entered a joint venture and formed Astaris LLC.[1] At this time Astaris became the assignee of the ESA and took over operations of the Pocatello manufacturing facility.[2] Under the ESA Idaho Power supplies two large blocks of power to Astaris; the first block is for 120 megawatts (“MW”) per hour and is a “take or pay” block (i.e. Astaris must pay for the power whether it uses it or not); the second block is for 130 MW and is based on all of Idaho Power’s costs directly related to supplying the second block of energy. The ESA was scheduled to expire December 31, 2002.

Facing the second lowest water year on record and extremely high prices for power in the volatile regional market, Idaho Power and Astaris executed a “Letter Agreement” amending the ESA. The Letter Agreement provides that Astaris would consume no more than 70 MW of energy per hour from the first block, starting from April 1, 2001 until March 31, 2003.[3] However, Astaris would continue to pay for 120 MW of energy per hour. Idaho Power would pay Astaris for the remaining 50 MW as a load reduction at then projected forward market rates over the term of the Agreement, minus a 13.5% discount. Under the terms of the Letter Agreement the parties agreed to extend the term of the ESA until March 31, 2003. The total cost for the 50 MW load reduction was estimated at $140 million over the term of the amended ESA.

As of December 10, 2001, Astaris ceased all production at the Pocatello manufacturing facility and responsibility for this site has shifted back to FMC Corporation.

The Commission Staff’s Position

On December 28, 2001, the Commission Staff filed a petition requesting that the Commission abrogate the load reduction rates set by the Letter Agreement. Staff contended that the Commission has jurisdiction and the authority to take this action pursuant to its retained jurisdiction over the ESA, the Idaho Public Utilities Act, the Idaho Constitution and associated case law from the Idaho Supreme Court. Staff insisted that the load reduction payments for the remaining term of the Letter Agreement/ESA (January 8, 2002 until March 31, 2003) exceed reasonable levels by $45.5 million or more than 400% over current forward market rates. Thus, Staff argued that the load reduction rates for remaining term of the Letter Agreement/ESA are unjust, unreasonable, impose an excessive burden on ratepayers and will provide a preferential windfall to Astaris. Thus, Staff alleged that these rates are no longer in the public interest. Accordingly, Staff requested that the Commission abrogate these rates and set new, just and reasonable rates for the remaining term of the Letter Agreement/ESA.

Astaris’ Position

Astaris disagreed with Staff’s position and requested that this case be dismissed. Astaris contended that in reliance on the payments it receives as a result of the Letter Agreement Amendment it made expensive alterations to its business. Astaris further contended that the Commission does not have legal authority to grant the relief Staff seeks. Astaris also argued that Staff’s position singles it out for financial punishment. Finally, even if the Commission were to have such power, Astaris believes it would be improper the Commission to exercise such authority. Astaris has made the following additional arguments.

1)The Commission’s authority is limited to determining whether to recover the costs in rates;

2)If the Commission finds it has the legal authority to consider this matter Staff has not presented sufficient evidence to allow for abrogation of the Letter Agreement;

3)Abrogating the Letter Agreement would be an unlawful collateral attack on the Commission’s prior decision approving it;

4)Letter Agreement abrogation made effective as of January 8, 2002 violates the prohibition against retroactive ratemaking;

5)Letter Agreement abrogation would constitute an unconstitutional impairment of contract;

6)Abrogation of the Letter Agreement would violate Astaris’ substantive due process rights;

7)Abrogation of the Letter Agreement would constitute an unconstitutional taking; and,

8)Irrespective of previous arguments, the Commission should uphold the Letter Agreement as a matter of sound public policy.

In its post-hearing brief Astaris argued that abrogation of the Letter Agreement would constitute a violation of Astaris’ right to Equal Protection under the Idaho and United States Constitutions.

Idaho Power Company Position

Idaho Power represented that its function in this case is to ensure that the Commission is apprised of the appropriate facts and legal authority concerning the Staff’s proposal.

Idaho Power argued that the Letter Agreement is a load reduction transaction. Accordingly, the Company is paying Astaris to not consume power. Thus, Astaris does not take title to the energy and then sell it back to Idaho Power. Idaho Power argued that Astaris is not providing a service to Idaho Power and the agreement to not consume is not a service. Idaho Power insisted that the reduction in consumption permits Idaho Power to avoid a service commitment. Therefore, Idaho Power states that Astaris is not a vendor of a good or service.

Idaho Power also argued that pursuant to the Idaho Public Utilities Act, specifically Idaho Code § 61-501, 61-502 and 61-503, utility contracts are subject to the Commission’s jurisdiction. Thus, the issue is not whether or not the Commission has jurisdiction to consider this matter but rather, when exercising that jurisdiction, does the Commission have the authority to modify a utility contract. Idaho Power contends that if sufficient evidence is introduced then the Commission has the authority to modify the contract. Agricultural Products v. Utah Power & Light Co., 98 Idaho 23, 557 P.2d 617 (1976).

Industrial Customers of Idaho Power

The Industrial Customers of Idaho Power argued that the 50 MW load reduction provided under the terms of the Letter Agreement is outside the regulatory reach of the Commission and cannot be modified or abrogated. The Industrial Customers also insisted that without the ability to rely on and enforce contracts, “the very foundation of our economy would crumble.”

1

MEMORANDUM

[1] Astaris LLC is a supplier of phosphorus chemicals, phosphoric acid and phosphate salts, producing a line of phosphorus and derivative products. Astaris was the largest single customer of Idaho Power, purchasing nearly 8.2% of Idaho Power’s total jurisdictional energy sales under a special contract.

[2] For this case Astaris LLC, Astaris of Idaho LLC and FMC Corporation are referred to collectively as Astaris.

[3] The Letter Agreement also provides that the second block of energy of 130 MW under the ESA will be reduced entirely and that the charges for demand set forth in the ESA will also be reduced accordingly.